I have been asked a number of times what the hell is wrong with Tony Abbott. The answer is simple: The same thing that is wrong with the Liberal Party. The Liberals are still largely governed by statist thinking and Keynesian economics. It is a party without a grasp of sound economic theory, any knowledge of the history of economic thought and thoroughly ignorant of economic history. James Guest, former Liberal MP, is a perfect and depressing example of this dangerous mixture of sanctimonious witlessness.

Some readers, still swayed by the current orthodoxy, are a little puzzled by the argument that government policies that bring about increased consumption come at the expense of economic growth (capital accumulation). The classical economists fully understood that economic growth was forgone consumption, meaning that investment, spending on capital goods, can only take place by directing resources away from consumption. It follows that the reverse must be true. Promoting consumption at the expense of savings results in resources being redirected from investment.

Unfortunately, policy-makers, not to mention a huge number of economists, genuinely believe that increasing the demand for consumer goods, by whatever means, will raise profits and thereby raise the demand for more capital goods which in turn would lead to an increased demand for labour. This Alice-in-Wonderland thinking (meaning the Keynesian multiplier) leads to the absurd conclusion that massively raising the spending power of the unemployed would generate enormous growth. Continue reading Why economic policies promoting consumer spending are bad for an economy→

Stephen Koukoulas was expressing a fallacious view shared by the vast majority of economists when he wrote that

if wage levels remains too low for too long. It holds back or even oppresses growth in consumer spending. The household sector needs steady real income growth if it is to maintain a solid growth rate in consumption spending. While borrowing and a run-down in savings can temporarily underpin higher spending, more fundamentally sound and sustainable increases in spending rely heavily on household income growth.

Gerry Jackson kindly allowed me to write this introduction. At first, I thought I would just write a basic outline. It was then that I realised the full import of what Gerry had written. For years Australia’s establishment right has promoted Steve Kates’ argument that the classical economists believed that booms and busts were an unavoidable and natural product of capitalism and that we must learn to live with them. This is totally at variance with the historical facts. Continue reading The Real Classical School Theory of the Trade Cycle→